We have not become a great and successful nation by denying people the right to make their own business contracts, or by promoting mediocrity.

A franchise is a business agreement, not a marriage contract. Senator HART. Miss Dunckel, that is a very forthright statement. Mrs. DUNCKEL. Thank you.

Senator HART. I would attempt to make a comment but I am afraid I should not about that last statement. "A franchise is a business agreement, not a marriage contract." So, I will refuse the temptation.

Mrs. DUNCKEL. Perhaps it is our double standard that has made a marriage contract a lifelong endeavor.

Senator, would you like me to introduce our membership directory as proof of the coverage of my association?

Senator HART. Yes, let it be made a part of our files.

(The document referred to may be found in the subcommittee files.) Senator HART. In the case of both the marriage contract and the franchisor-franchisee contracts, when legislation is developed with respect to either one and when courts undertake to apply the legislation in either case, all they are trying to do is grant justice to the parties. Mrs. DUNCKEL. I realize that.

Senator HART. And not undertaking to penalize either of them. How we do it, of course, is the subject of this debate.

Mrs. DUNCKEL. I think because you are working on amendments in the definitions in this bill, you have indicated the fact that you are tying it down to being more specific, which I think, is the principal complaint that most people have against it, although there is much to be said for the fact that contract law in our country is fairly effective through its own interpretation by the courts in protecting both parties. We are trying to find out when there is a specific illness, and treat that illness. We should not try to give vaccine to the whole business population that is the point we are trying to bring out.

Senator HART. We are trying to provide the vaccine but let the courts administer it on a case-by-case basis. That is what we are really trying to do.

Mr. Cohen?

Mr. COHEN. No questions.

Senator HART. Mr. Chumbris?

Mr. CHUMBRIS. Mr. Chairman, since we are pretty much on time, I want to bring out one thought primarily as a suggestion to some of the comments made by some of the franchisees, not only to me but, I believe, to my capable colleague over here on my right, Chuck Bangert, the counsel to the majority, that they are not concerned that this bill will drive some of the franchisors into vertical integration and take over their distribution systems themselves.

Some of the witnesses have made comment on that but during the dual distribution hearings, both the Chairman of the Federal Trade Commission, Paul Rand Dixon, and Donald Turner, head of the Antitrust Division of Justice, made the comment, that the dual distribution bills may very well drive some of the manufacturers into vertical integration, and they went on to say that

there is nothing per se wrong with vertical integration, particularly when such integration is undertaken for the purpose of increasing production efficiently, reducing costs, improving quality of service, and making more efficient means

of distribution. Indeed, given competitive conditions, such gains in efficiency through vertical integration will in substantial part, be passed on to the ultimate consumer and increase the standard of living of the community.

This is found on page 207 of Paul Rand Dixon's statement. And on page 272, Donald Turner said almost exactly the same words.

Obviously vertical integration is not and should not be made unlawful per se. It often achieves significant economies, thus moving goods to ultimate consumers at a lower cost. Moreover, manufacturers should remain free to alter their systems of distribution whether toward vertical integration or toward more reliance on independent distribution as changing economic conditions and circumstances may dictate. Consequently, it is not in our view necessarily a violation of antitrust laws for a manufacturer to decide to convert entirely to distribution through his own outlets, even though the change results in loss of business opportunities to firms who formerly participated in the sale of products. I think that there has been some comment among franchisees that this bill is not that tough. They will not drive a franchisor to his own distribution system. I think there is a word of warning from the head of the Federal Trade Commission and also from the head of the Antitrust Division of the Department of Justice, that they feel that the dual distribution bills as written may do just that very thing. Mrs. DUNCKEL: That was certainly brought out in the conference in which my brief was developed, that it could very well happen. Although it is not illegal, I do not think it is desirable from the committee's point of view, perhaps it is not desirable for the national economy, because it would be a hardship on the small appliance producers who could not afford to, to go to a vertical integration system. It would strengthen and perhaps add to the concentration of any industry in the hands of the large companies. And it might at the same time, add to costs. Presumably, we use our present system of distribution through distributors and dealers because we think it is the most effective and the lowest cost method of moving our goods

to consumers.

Mr. CHUMBRIS. Of course, as one witness pointed out, the large manufacturer or franchisor could stand that cost but the smaller one could not.

Mrs. DUNCKEL. That is right.

Mr. CHUMBRIS. But the worst thing is going to happen to the independent wholesale people who might be forced out of business. Mrs. DUNCKEL. That is right.

Mr. BANGERT. Of course, we have heard that in the past. After the Standard case, for instance, the gasoline companies indicated that they were going to vertically integrate. They have not done it yet. Is not this a decision that will be made considering many factors such as taxes, and labor problems? And certainly, I would assume that this type of legislation may be a factor in the consideration, but I do not think we can assume that it will automatically drive the franchisors into vertical integration although it may be a consideration.

Mr. CHUMBRIS. But again, on that point, we have got to bear in mind that there might be something peculiar about the major oil business that is different from some of the other industries that we are talking about here, and that is why both Mr. Dixon and Mr. Turner stated that it may drive them into vertical integration, but this bill would apply to all industries, including the oil and gas

industry. This industry may decide not to go into vertical integration for their own reasons but this bill might drive others into that.

Mrs. DUNCKEL. The stronger and larger companies into it.

Mr. CHUMBRIS. And that is one of the problems we have had today, in trying to get toward what industries need to be considered within this bill and what industries need not be considered under this bill.

Senator HART. Mr. Cohen?

Mr. COHEN. It seems to me somewhat ironic that franchisees having been given those words of warning by the Justice Department and having been given those words of warning by the FTC and having been given those words of warning by franchisors ever since we have been holding hearings here, still almost unanimously are willing to take that chance. It may well be that that old bromide, give me liberty or give me death, is more deeply ingrained in our economic system than we think it is.

Mrs. DUNCKEL. I do not know that

Mr. COHEN. People that are going to be most affected in terms of the warnings that they are given-if you get this bill, we are going to vertically integrate and you poor people are going to be put out of business it is those poor people who are almost unanimously supporting this bill.

Mrs. DUNCKEL. Franchisees.

Mr. COHEN. Franchisees; and they seem willing to take that particular chance.

Mr. CHUMBRIS. But again, we are speaking perhaps not toward the whole issue. The people who are coming in here complaining are those who are affected by their franchisee problems but this bill will affect all franchisees, whether they are the ones who come in and complain or not.

Mrs. DUNCKEL. That is right.

Mr. CHUMBRIS. That is the point we have to bear in mind.

Mrs. DUNCKEL. The thing that surprised me when I really studied this bill, as a layman-I think of a franchise as a beautiful diploma to hang on the wall with all the gold seals and statements from both sides about what their responsibilities are. Under this proposed legislation two or three consecutive sales could constitute a franchise. That is not a franchise in the layman's concept of what a franchise is. This is a continuing commercial relationship and Senator Eastland's bill even drops out the 12-month provision and the 25-percent provision, and it looks as if, if his bill or a portion of it were enacted, every order would have to have written into it all of the terms and conditions of what is now called a franchise. It seems to me it would add immeasurably to the paperwork and confusion if that is what is really intended by that provision. Am I carrying it to a ridiculous extreme, do you think?

Mr. COHEN. No.

Senator HART. Thank you very much. I want to thank everyone who testified this morning for being so cooperative in terms of time. We are adjourning, to resume in this room next Monday morning

at 10.

(Whereupon, at 11:20 a.m., the hearing was adjourned, to reconvene at 10 a.m., Monday, October 16, 1967.)

FRANCHISE LEGISLATION

MONDAY, OCTOBER 16, 1967

U.S. SENATE,

SUBCOMMITTEE ON ANTITRUST AND MONOPOLY OF THE COMMITTEE ON THE JUDICIARY, Washington, D.C. The subcommittee met, pursuant to recess, at 10:10 a.m., in room 1318, New Senate Office Building, Senator Philip A. Hart (chairman) presiding.

Present: Senators Hart and Fong.

Also present: S. Jerry Cohen, staff director and chief counsel; Charles E. Bangert, assistant counsel; Peter N. Chumbris, chief counsel for minority; James S. Schultz, minority counsel; Thomas B. Collins, professional staff member, Committee on the Judiciary; Gladys Montier, clerk; and Patricia Bario, editorial director.

Senator HART. The committee will be in order.

Our first witnesses today will be presented by the gentleman who will testify first, who has testified before, and we welcome him back, Mr. Harry Rudnick, counsel for the International Franchise Association, Chicago.

STATEMENT OF HARRY L. RUDNICK, GENERAL COUNSEL, INTERNATIONAL FRANCHISE ASSOCIATION, ACCOMPANIED BY ROBERT M. ROSENBERG, DIRECTOR, INTERNATIONAL FRANCHISE ASSOCIATION, AND AL LAPIN, INTERSTATE INDUSTRIES, INC. Senator HART. Let me order the prepared statements of the witnesses be printed in the record in full as though given in full. If there is any possibility of summarizing as we go along, fine. If there are any additions any of you would like to make, it is quite in order to do so.

Mr. RUDNICK. Good morning, Senator Hart.

My name is Harry L. Rudnick. I appear here as general counsel of the International Franchise Association and in its behalf.

The IFA is a trade association representing the franchise industry. It presently has some 165 members, among whom are relatively small companies as well as relatively large ones. The association has adopted a code of ethics which expresses its membership interest in the highest standards of business ethics. It has held educational and legal seminars at leading universities, such as the University of Chicago, Harvard, University of California at Los Angeles, and Northwestern University.

It is a strong proponent of fairness in the relationship between franchisor and franchisee. It deplores with as much indignation as any member of this highly respected subcommittee any overreaching,